60-Minutes did a special on the unemployment problem in the U.S and specifically in California. We are currently in a debt-deflationary depression (see this MacroTwits video with Gregor Macdonald from 8/16/2010, he explained it). The trillion+ in Government stimulus (quantitative easing) was supposed to cure this problem. Instead the money backstopped banks, inflated stocks and commodities, deflated the US Dollar and attempted to put a floor under housing prices by buying Treasuries/agency mortgage-backed Securities to lower mortgage rates. As you can see from the Clear Capital Home Data Index reported last week, we might be experiencing a double-dip in housing.

The Fed's second stimulus (quantitative easing #2) could be announced at the November 3rd meeting which would focus on buying longer-term Treasuries to lower rates even further. Short term rates are at 0%. The Government hopes it will fuel refinancing activity and lower borrowing costs for businesses and households to provide an economic jolt. Hopefully commodity inflation doesn't mess that up.

The major stock averages since March 2009 are up nearly 80%. What's supposed to happen now? Judging from previous recessions, the market and real economy are supposed to converge. The stock market is supposed to be a forward looking indicator. If that's the case then unemployment should come down and the underlying economy should improve in the near future. If that scenario doesn't pan out, commodity costs will squeeze businesses and households (just like early 2008) and perhaps bring on a double dip recession. That in turn could lower earnings (EPS) and deflate the reflation trade, but monetary inflation would still provide some sort of backstop for commodities. This is all my opinion of course. I'm not an economist. We'll see what happens. Here's a quote from Scott Pelley of 60 Minutes. The UNDERemployment number they are talking about is the U6 statistic at BLS.gov (Table A-15. Alternative measures of labor underutilization). State U-6 is here.

"The national unemployment rate of about nine and a half percent sounds incredibly high and of course it is. But it doesn't nearly capture the depth of the trouble. It doesn't count the people who've seen their hours cut to part time. It doesn't count the people who have quit looking for work.

If you add all of that together, the unemployed and the underemployed, it's not nine and a half percent, it's 17 percent; and in California it's 22 percent.

And what makes it so much worse is that, nationwide, one third of the unemployed have been out of work more than a year. That hasn't happened since the Depression."

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